Climate Change & The Financial Services Industry Module 2 – A Blueprint For Action
Prepared for the UNEP Finance Initiatives Climate Change Working Group by Innovest Strategic Value Advisors
With guidance from UNEP Finance Initiatives Project Coach Dr. Andrew Dlugolecki
GHG Market Framework Study – Module 1 2 UNEP FI
TABLE OF CONTENTS Preface ...... 3 Executive Summary...... 4 Acronyms ...... 7 1. Climate Change and the Role of the Financial Services Industry ...... 8 Introduction...... 8 What Is the Role of the Financial Services Industry? ...... 9 What Can Financial Institutions Not Do?...... 11 Imperatives for Action...... 12 2. What Are Financial Institutions Actually Doing? ...... 16 Insurance Broking, Underwriting and Reinsurance...... 16 Commercial Banking...... 19 Asset Management...... 21 Project Finance...... 24 Emissions Trading Markets ...... 27 Professional Services...... 29 3. Barriers to Action...... 31 Cognitive Barriers in the Financial Sector...... 31 Political /Regulatory Barriers...... 32 Analytical Barriers...... 35 Market Operational Barriers...... 35 4. Recommendations...... 37 For All Financial Services Companies and Governments ...... 37 For Policymakers...... 37 For Market Regulators...... 39 For All Financial Institutions ...... 39 For Commercial Banks...... 40 For Insurance and Reinsurance Underwriters ...... 40 For Asset Managers...... 41 For Project Finance...... 42 For Professional Services...... 43 For Non-Financial Corporates...... 44 Immediate Action Steps ...... 45 Contacts ...... 46 APPENDIX 1...... 49 ORGANIZATIONS PROVIDING DIRECT INPUT INTO THE STUDY ...... 49
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Preface
This report constitutes the second part of a major two-phase study on the financial services sector and climate change commissioned by the United Nations Environment Programme Finance Initiatives (UNEP FI) Climate Change Working Group (CCWG). The first phase of the study (Module 1, ‘Threats and Opportunities Facing Financial Institutions) discusses the general relevance of climate change to the financial services industry, the need for long-term, ‘beyond-Kyoto’ market-based frameworks for fostering finance sector participation and the kind of threats and opportunities facing the financial services industry in the future. Here, we present the findings of a more detailed examination of the possible future role of the finance sector in dealing with climate change, the prevailing attitudes of financial services companies in responding to the issue and the kinds of commercially-oriented adaptation and mitigation activities currently being implemented in response. The report identifies the key cognitive, political, analytical and market-related barriers to action, and provides practical recommendations to both policymakers and financial services providers on overcoming these barriers. UNEP FI CCWG is a group of companies and other bodies associated with the UNEP FIs, which are particularly concerned about the issue of Climate Change. Its aim is to operationalise the principles enunciated in the various UNEP Financial Institutions and Insurance Industry Initiative position papers by research and good practice. Its membership comprises: Andlug Consulting, Aviva, CAF, Citigroup, Dresdner Bank, Gerling Group, LPC, Munich Re, Prudential, SAM Sustainability Group, Swiss Re and UBS. Innovest Strategic Value Advisors is an internationally recognized investment research and advisory firm. Founded in 1998, the firm currently has over US $1 billion under direct sub-advisory mandates and provides custom portfolio analysis and research to leading fund managers around the world. Innovest is headquartered in New York City with major offices in Toronto and London. Dr Andrew Dlugolecki is a past chairman of the UNEP Insurance Industry Initiative. He has served the IPCC Assessment process as the chief author of the financial services chapter in the Second Report, and was review editor for that chapter in the Third Report. He has chaired two studies of Climate Change for the UK Chartered Insurance Institute. He retired from senior management in CGNU plc in 2000, and is now an independent consultant in climate change and financial services. Much of the input to this study has come from direct discussions, correspondance and interviews with practitioners from the financial services industry, and the authors are indebted to them all. A complete list of all the contributing organizations is presented in Appendix 1. The authors would like to express particular thanks to MMC Enterprise Risk (part of the Marsh & McLennan Group) for detailed review input.
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Executive Summary
Scientific and technical reports present compelling evidence that human-induced climate change is upon us, and that its consequences could be devastating. Worldwide economic losses due to natural disasters appear to be doubling every ten years, and have reached almost $1 trillion over the past 15 years. If current trends persist, the annual loss amounts will, within the next decade, come close to US$150 billion. At the same time, the greenhouse gas emissions regulations and emissions trading schemes that are close to becoming a reality in large parts of the world will have direct competitive consequences for large sections of the economy. That financial services companies will be faced with a range of threats and opportunities on account of climate change is, therefore, no longer a matter of conjecture. What is undecided, however, is the manner in which companies should respond. As this report shows, there are radically differing opinions on the extent to which the industry could be affected by climate change, and what measures financial services companies could or should take now and in the future. With political momentum regaining pace, best practice in responding to climate change is likely to evolve rapidly in the near future. Financial institutions perceive their role with respect to climate change to be more about the facilitation of transactions, market development and the pursuit of economic profitability than the attainment of particular political outcomes. With this in mind, universally applicable suggestions on how financial institutions can deliver market solutions to the climate change problem most effectively include: Helping to structure and monitor an efficient market system by working with securities and exchange regulators, actuaries, accountants and other agents of the financial markets. Engaging with other stakeholders (particularly along the business-to-business axis). Investing in and supporting the development of products and services that contribute towards adaptation and mitigation. To date, progress has been slow and is concentrated in those organizations and entities with strategic interests in first mover advantages, i.e., those entities that see value in ‘sustainability’- oriented investing, or that are directly and obviously affected by climate change impacts or mitigation policies. Beyond this, the view that climate change is of strategic importance is more prevalent within the insurance and reinsurance business than perhaps any other segment of the financial services industry. As yet, however, it has proved extremely difficult to explicitly factor climate change-related issues into underwriting costs due to problems in identifying and quantifying the incremental risks involved. Likewise, despite a growing awareness of the issue in commercial banking, the extent to which climate change and GHG mitigation regulations will affect lending decisions and the credit risk management policies that govern their behavior towards larger corporate clients remains largely unexplored. Both insurers and bankers appear to be more comfortable reacting to the manifestations of changing weather conditions than they are adopting proactive stances on the political issue of climate change per se. With some exceptions, asset managers and the analysts that guide them appear to be largely ignorant of the extent to which climate change could affect their business. The potential of climate change and GHG regulations to destroy value in investment holdings, and impact
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equity prices, corporate earnings and relative sector risk has yet to be seriously examined. Credit rating agencies are becoming better informed, in that analysts show greater understanding of the general issues, although the development of quantitative tools for factoring GHG risks into debt ratings is lacking. At the project finance level, data from the World Bank’s Prototype Carbon Fund indicate that returns can be enhanced by several percentage points, although other practitioners have to date fared less well. Making full use of carbon finance opportunities plus other sustainability benefits (which can increasingly be monetized) can only become more important in future. According to the G8 Renewable Energy Task Force, roughly $10-15 billion has been committed to renewables over the next 2-5 years by major companies, and up to $1.5 billion is being used to finance such projects in developing countries each year. The emissions trading markets are clearly still under development. However, a clearer picture has emerged of the measures that need to be taken to stimulate greater trading activity, and the market will grow in the coming years, providing the political will to reduce emissions and assign carbon a value is there. Forecasts of the future GHG credit trading market project a rapid growth from $10 billion by 2005 to over $2 trillion per year by 2012. Four factors prevent action on climate change issues in the financial services industry: Cognitive barriers, which relate to the low level of awareness, understanding and attention afforded to the climate change issue; Political barriers, associated with regulatory and policy issues, and governmental leadership; Analytical barriers, relating to the quality of information for understanding the impacts of climate change and GHG regulations for financial services companies; Market barriers, which surround the efficient functioning of transaction based markets for emissions credits, green certificates and such like. Recommendations for overcoming these barriers, and for spurring greater involvement of financial institutions in climate change, are summarized in the table below. In recognition of the fact that implementation of these recommendations will take time, the following three action steps are offered as a means of stimulating immediate progress on the issue.
(1) The formation of an ‘awareness raising’ task force of senior finance sector executives to inspire individual financial institutions, industry associations, financial regulators and other industry umbrella associations to support education and engagement on climate change using this study’s reports as a blueprint for action. (2) The formation of a team to develop a quantitative analytical methodology – the “Carbon Asset Pricing Model” -- for capturing the asset pricing and valuation implications of climate change and carbon regulations. (3) The formation of a parallel project team to examine methods for capturing, monetizing and optimizing the full range of environmental aspects within project finance settings.
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SEGMENT RECOMMENDATION All Companies Educate senior executives, decision makers on relevance of climate change & Governments Adopt a sustainability strategy for products and services; Manage own emissions; seek carbon neutrality Policymakers Commit to GHG reductions, coordinate with industry, foster emissions trading and provide clean technology incentives
Promote greater transparency on GHG issues in financial markets
Provide technology, know-how transfer, carbon ‘rights’, flexible mechanisms and financial support for LDCs
Market Regulators Set a framework to improve the provision of investment-relevant information on climate change- related risks All Financial Institutions Become an active participant in creative stages of new GHG markets, products and services
Insurance & Reinsurance Disseminate risk research findings; adjust products, services in light of climate change risks
Adapt insurance products to aid development of GHG markets
Develop Alternative Risk Transfer, microinsurance and other products to assist LDCs
Commercial Banking Develop carbon risk management and benchmarking tools for lending
Incorporate energy consumption into mortgage and other loans to generate emissions credits
Provide microfinance services, know-how on carbon-efficient lending to LDCs
Asset Management Reflect climate change risk factor in equity/sector valuation and asset allocation decisions
Encourage greater corporate disclosure and strategic engagement with investee companies
Extend scope of investing into clean technology development activities
Project Finance Advise on, facilitate GHG market transactions
Enhance project cash flow & returns via GHG/green market instruments; structured cash flow; credit bundling; credit strips; creation of carbon price index; and a credit clearing house Professional Services Develop standardized accounting tools to incorporate GHG emissions/ emissions reductions credits into balance sheet assets or liabilities
Ensure that actuarial guidance considers all aspects of climate change.
Develop robust, reproducible and transparent methodology for rating both carbon credits from emission reduction projects, and credit quality of counterparties to emissions trades Develop more quantitative tools for reflecting carbon risk into debt ratings.
Industrial Sector Report on GHG emissions and climate change management strategy
Adopt lead role in clean technology development
Share knowledge on GHG trading, project carbon price sensitivity
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Acronyms
ART – Alternative Risk Transfer CAT – Catastrophe (Bonds) CC – Climate Change CDM – Clean Development Mechanism (one of the flexible mechanisms of the Kyoto Protocol) ERUPT - Emissions Reduction Units Procurement Tender GHG – Greenhouse Gas IFC – International Finance Corporation IIGCC - Institutional Investors Group on Climate Change IPCC – Intergovernmental Panel on Climate Change JI – Joint Implementation (one of the flexible mechanisms of the Kyoto Protocol) LDC – Less Developed Country NGO- Non-Governmental Organization PCF – Prototype Carbon Fund ROC – Renewables Obligation Certificate SEC – Securities and Exchange Commission SRI – Socially-Responsible Investing UNEP – United Nations Environment Program UNEP FI - United Nations Environment Program Finance Initiatives UNFCCC – United Nations Framework Convention on Climate Change VERs – Voluntary Emissions Reductions
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1. Climate Change and the Role of the Financial Services Industry
“The first question, ”Is the Earth’s climate changing?” has been answered with an unequivocal yes”
Richard Harvey Group Chief Executive, Aviva plc
INTRODUCTION
Scientific and technical reports present compelling evidence that human-induced climate change is upon us, and that its consequences could be devastating (see Module 1 for more details). Worldwide economic losses due to natural disasters appear to be doubling every ten years, and have reached almost $1 trillion over the past 15 years1. If current trends persist, the annual loss amounts will, within the next decade, come close to US$150 billion. Indeed, recent IPCC data indicate that even if GHG emissions were cut to zero overnight, global warming would still continue for at least another 100 years owing to past emissions effects2. At the same time, GHG-limiting regulation, and the ability to trade emissions ‘offsets’ or ‘credits’, is now (or will be very soon) a reality in large parts of the world. These actions will also have implications for the performance of companies, investments and loans. That financial services companies will be – are being – faced with a range of threats and opportunities on account of climate change is, therefore, no longer a matter of conjecture (see Figure 1). What is undecided, however, is the manner in which companies should respond. As this report shows, there are radically differing opinions on the extent to which the industry could be affected by climate change, and what measures financial services companies could or should take now and in the future. To date, some criticism has been directed at the financial services industry from outside parties over a perceived lack of interest or unwillingness to be more proactive. In our opinion, this is somewhat unfair, given the political hesitancy in dealing with the issue and the lack of wider support for many of the sector’s early GHG-related initiatives (the abandonment of several private sector carbon funds bears this out). With political momentum now regaining pace, many companies are once again turning their attention to the issue out of strategic choice or regulatory requirement. Best practice in responding to climate change is likely to evolve rapidly in the near future.
1 See accompanying report: Climate Change and the Financial Services Industry, Module 1 – Threats and Opportunities, UNEP Finance Initiatives Climate Change Working Group, 2002. 2 IPCC Synthesis Report, 2001
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SEGMENTS OF THE FINANCIAL POTENTIAL IMPACTS DUE TO SERVICES INDUSTRY CLIMATE CHANGE
Providers of Capital Disruption to global economy Reduced confidence • Individuals • Corporations • Foreign Investment Advisor s Impacts on equity value, debt quality Implications for investor recourse • Consultants • Analysts • Credit Rating
Impaired investment performance Invest or s New markets in clean technology • Fund Mgrs • Investment Banks • Project Finance Implications for fiduciary duty
Reduced corporate creditworthiness Lender s Damage to property/physical assets • Corp. Banking • Mortgages • Commercial Loans New markets in clean technology
Credit and liquidity problems Insur er s Incr. demand for risk transfer products • Reinsurers • Underwriters • Brokers Opportunities in GHG markets
Growth of GHG credit trading market Br oker s/ Deal er s Growth of risk management reqmnts • Inv. Dealers • Commodity Traders • Brokers Increased cost of mitigation reqmnts User s of Capital Losses due to weather extremes • Individuals • Corporations • Governments Public/private partnerships Demand for greater risk disclosure Regul at or s Need for accounting guidance • Listing/Disclosure • Accounting Stds • Banking Law Loss of investor confidence
Figure 1 – Segments of the Finance Industry and Potential Relevance of Climate Change Source: Innovest
Before exploring some of these trends in greater detail, it is important to step back and first consider the role of the financial services industry with respect to climate change and some of the key motivating factors underpinning future action.
WHAT IS THE ROLE OF THE FINANCIAL SERVICES INDUSTRY?
History teaches us that for politically-driven market systems to function effectively, financial institutions must play a prominent role in the market evolution process. From the creation of initial demand for an underlying good or service (as in the U.S. SO2 market in the 1990s), to the
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promulgation of transaction regulations, the protection of property rights and enforceable legal ownership provisions, and the requirement for transparency and disclosure, the finance sector has a critical role to play in creating the right conditions for market-based, commodity-oriented solutions to thrive3. Valuable experience in creating markets around the energy sector has already been acquired, so that commentators believe that the process of developing a mature market for carbon may take as little as five years (see Figure 2).
Time taken for liquidity (I.e. commoditisation) 5 years COCO22 (estimate)
6 years USUS SOSO22
7 years UKUK ElectricityElectricity
10 years UKUK GasGas
15 years EuropeanEuropean OilOil
Figure 2 – Approximate Time Taken for Market Maturation Source: Natsource
As Module I showed, policymakers are now united in their belief that market solutions will play a pivotal role in whatever course of strategy national and regional lawmakers take, whether this is the Kyoto Protocol; the voluntary carbon intensity method (as advanced by the U.S.); “Contraction and Convergence”. And for market solutions to function effectively, financial institutions must play a full and active role in their development and operation (see box insert).
3 Richard Sandor, ‘The Road To Price Discovery’, Environmental Finance, May 2002
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From discussions with financial institutions and other GHG market specialists during the course of this study, the following suggestions can be made on how financial institutions can effectively deliver market solutions to the climate change problem: o Helping to structure and monitor an efficient market system by working with securities and exchange regulators, actuaries, accountants and other agents of the financial markets o Meeting statutory responsibilities and voluntary commitments to look at social and environmental issues and in doing so focus greater attention on climate change as an analytical factor. o Working to create other conditions crucial to the formation of an efficient emissions trading system i.e., a standardized “commodity”; standardized trade characteristics, organized exchanges, etc. o Creating and providing products and services that contribute towards adaptation and mitigation efforts (such as weather derivatives and catastrophe bonds) o Reexamining the extent to which fiduciary duties may necessitate examining potential sector and company risk relating to climate change, and factoring this into their proxy voting strategies. o Managing their own property risks arising from extreme weather events and pursuing leadership in areas such as energy efficiency within their own property portfolio.
Moreover, financial institutions have a key role to play in advising companies and investors on the potential market risks associated with climate change and government GHG regulation, in the raising of finance for GHG projects, in structuring deals for potential vendors and purchasers of emissions credits, and in developing solutions to manage financing risks. Indeed, banks and insurance companies are used to dealing with highly complex issues, and over the years have developed carefully conceived, proprietary quantitative risk management methodologies to help them characterize and value complex risk scenarios.
WHAT CAN FINANCIAL INSTITUTIONS NOT DO? Our research indicates that financial institutions view themselves more as instruments of change rather than initiators4. Not surprisingly, therefore, most of the mainstream investment institutions contacted during the study refrain from an overt advocacy role on climate change. Aside from concerns that they lack the scientific and technical expertise to adopt such a stance, and a deliberate preference for party political neutrality, many respondents simply question the propriety of lobbying for outcomes on an issue they see as being more a matter for society and its elected representatives, and of little direct financial relevance anyway. Of course, where clear financial interests are evident, such as in the facilitation of transactions and other market development issues, financial institutions are not afraid to actively engage with policymakers. Dresdner Bank, for example, has been part of a group urging the German government to adopt a domestic emissions trading scheme ahead of the E.U. scheme. In terms of collaborative efforts, several financial institutions believed that the industry as a whole would be very wary of taking collective action on a commercial level, for fear of being
4 Based on the interviews and written responses received during the Module 2 research process
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accused of adopting non-competitive tactics. This, it is felt, tends to limit the level of intra industry cooperation on pervasive, industry-wide issues such as climate change. It is also apparent that financial institutions cannot – and for fiduciary and competitive reasons should not – engage in prolonged, non-commercial, non-revenue generating activities of social or public interest. In some cases, research and development activity in new markets such as emissions trading may be more acceptable, however, institutions cannot afford to carry out trial runs of Clean Development Mechanism (CDM)-type projects indefinitely. Finally, it is clear that insurers in particular cannot be expected to take on unbounded liabilities and unknown (or predominantly unquantified) risks. Put simply, it is not possible to insure what you can’t attach a value to. European insurance companies unwillingness to provide coverage to companies on biodiversity damage is a case in point. The European Insurance Committee has said it would decline to provide coverage because “it was nearly impossible to quantify the value of biodiversity”5.
IMPERATIVES FOR ACTION According to Carol Browner, the U.S. EPA Administrator under President Clinton, environmental issues enter into popular consciousness in one of two ways: a major ‘event’ that brings the reality of the situation home to society at large; or, an alignment of interests between separate constituencies who form broader coalitions to drive change6. Applying this logic to climate change, it seems clear that absent a sudden and rapid deterioration in climatological conditions, the key to progress is greater cooperation and collaboration between all stakeholders based on, in this case, a shared interest in protecting and creating value. For the financial services industry, this means that climate change action must provide an attractive ‘return’. Ultimately, investment banks want fees for selling advice and arranging capital, fund managers want to increase assets under management and to achieve superior risk- adjusted returns for investors, and insurance companies seek payments in return for bearing others’ risk. Climate change issues will need to positively impact these core industry drivers to enhance the willingness of individuals and groups to take action in greater numbers. Momentum in recognizing the climate threat and taking action to curb emissions is gathering pace globally (see box insert). However, to drive the issue into mainstream consciousness within the financial services community and onto the agendas of company directors, executives and institutional investors, it is necessary to discover climate change and carbon as a determinant of value within the industry’s respective functions.
5 Environment Daily 1219, dated 22-05-2002 6 Speaking at the U.S. Environmental Law Institute, Washington D.C., May 2002
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MOMENTUM ON CLIMATE CHANGE ACTION IS GATHERING PACE…..
At the present time, a number of powerful external forces are converging to make climate change and carbon-related issues relevant to financial services companies. These include: Strengthening scientific consensus on the impacts of climate change E.U. and Japanese ratification of the Kyoto Protocol. Political progress on GHG mitigation within the U.S., both in the White House and on Capitol Hill The launch of the Carbon Disclosure Project, a coalition of institutional investors (with collectively over $5 trillion in assets under management) pressing major companies to disclose investment-relevant information concerning their greenhouse gas strategies and emissions. The success of the Dutch ERUPT program, in which the Dutch Government paid out nearly US$40M to 5 successful project bids for 4 million metric tons of CO2 allowances. The experiences of the World Bank’s Prototype Carbon Fund, which is in the process of expand to support greater market interest, and which has led to the emergence of a series of similar ‘spin-off’ funds. The formation by Gensec Bank of the first weather hedging products in South Africa, and the intended expansion of this service to other emerging markets. The success of Australia’s green energy certificates trading scheme. Increasing focus on climate change as a corporate governance and accounting issue for pension fund trustees and fiduciaries. The steady growth of the emissions trading market, where over 70 transactions have now been reported involving some 95 million tons CO2eq. Growing willingness of respected mainstream financial institutions to stir debate over implications of climate change for the finance and insurance business.
From the perspective of changing climate conditions, the derivation of value is relatively straightforward, at least in principle. Insurers, reinsurers, lenders and investors will need to adapt the way they conduct their business to account for climatological shifts or face the prospect of disproportionate financial loss or lower investment returns (or, where economic productivity is actually enhanced by climate change, missing out on new markets). However, in practice, actuarial data limitations and other analytical barriers mean that this process of change will be far from easy. From a mitigation perspective, however, the value creation process is more complex (see Figure 3). The critical initial step, our research suggests, is the commitment by policymakers to emissions reductions. This, in turn, provides validation for both emissions trading (and the various GHG market support services), and the pursuit of low carbon intensive technology solutions. These market-based activities will lead to the establishment of a ‘price’ for carbon, which is a prerequisite for GHG assets and liabilities to be included on the balance sheet and for
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strategic planners to estimate the financial value of carbon in project development and capital spending situations. At this point, carbon becomes recognized by the wider financial community as a factor that needs to be incorporated into all calculations of equity value, credit risk, corporate risk management and project viability. In other words, carbon becomes recognized as another determinant of financial value.
Policymakers COMMITMENT TO REDUCING EMISSIONS
Mitigation Regul at ion
Policymakers Policymakers Tr ading Carbon-Light Exchange Regulators Infrastructure Technol ogies, R&D Corporations ‘Kyoto’ Entities Venture Investors
Legal Mar ket Implementation Consumers GHG Brokers/Dealers ‘Fac il it at io n’ of New Syst ems Corporations Consultants CARBON PRICE/ VALUE DISCOVERY
Accountants Lenders/Inv. Bankers Carbon Factor in Market Regulators GHG Asset s/ Liabil ities in Consultants C o r p. Ac c o unt s Project Activity Corporate CFOs Corporations
Fund Managers Corporate CFOs Equity, Debt Cor por at e Risk Equity Analysts Anal ysis Management Inv. Bankers Credit Risk Raters Risk Mgnt Specialists Pension Fund Consultants CARBON AS DETERMINANT OF CORPORATE VALUE
Figure 3 – Evolution of Carbon As A Driver of Financial Value Source: Innovest
Of course, this process of value creation is necessary, but not sufficient, to achieve the transformation required. At present, the financial services industry as a whole is facing a period of considerable upheaval owing to - U.S. corporate governance and accounting scandals; - the convergence of banking and insurance; - the expansion of the boundaries of what is considered legitimate fiduciary responsibility, some of it fueled by pension fund legislation;
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- growing appreciation of the limitations of traditional financial performance metrics in capturing true company value; - increasing concerns over the ability to fund burgeoning health and retirement programs; - the realization within the insurance industry that underwriting and asset management are not independent activities; - following the World Trade Center attacks in New York City and the subsequent bear market, the move by financial institutions to allocate capital away from creative structured 'risk' products towards core traditional products and short-term solutions. - the realization within the insurance industry that it can no longer depend on a permanent bull stockmarket to compensate for neglect of technical underwriting competence; and - recognition that the volatility of economic markets en masse may pose a greater threat than the exposure from any single business stream. In the midst of all this activity, there is clearly a risk that the climate change issue will not garner the level of attention necessary for any serious action to take place. To overcome this problem, we recommend that a task force of senior executives from the finance and insurance sector be formed. This group would be charged with inspiring individual financial institutions, industry associations, financial regulators and finance sector institutions to support education and engagement on climate change using this study’s reports as a blueprint for action.
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2. What Are Financial Institutions Actually Doing?
Taking the wider financial services industry into account, it is possible at the present time to divide financial institutions into 4 distinct categories according to the extent to which actions have been taken to manage climate change in the broadest sense: 1. “Unaware”: Companies that give every indication of being generally unaware of the business relevance of the issue and have therefore done nothing. 2. “Wait and See”: Companies that are focused on becoming informed on the issue and on the development of basic policy (usually through the formation of a small advisory unit), but that have not yet implemented any operational or management changes on account of climate change. 3. “Proactive”: Companies that have begun to develop new products, new lines of business, or new strategies based on the threats and opportunities presented by climate change. 4. “Leaders”: Companies at an advanced stage of product development and thinking on the GHG markets and what climate change means to their business or those with entire business groups dedicated to servicing some particular aspect of the climate change issue. Our research indicates that most mainstream financial institutions can be categorized as being Unaware of the climate change issue or as having adopted a Wait and See attitude. These firms are content to concede any first mover advantages in preference to learning from others’ experiences and becoming better educated in the meantime. However, a small handful of companies are considered to be either Proactive or even as sector Leaders, depending on the extent to which they have developed and operationalized strategies based on climate change and the GHG markets. These are mainly broker/dealers involved in GHG trading (Natsource, CO2e.com and the like), reinsurers most exposed to catastrophic weather events (such as Swiss Re and Munich Re) and asset management businesses with prominent socially- responsible investment groups or other resource-related investment interests (such as the Hancock Natural Resources Group). Breaking down the findings according to the main functions of the financial services industry, we can make the following observations:
INSURANCE BROKING, UNDERWRITING AND REINSURANCE